VALLEY BUSINESS / HIGH DEMAND FOR APARTMENTS

Brokers for Complexes Say Times Favor Sellers

Real estate broker Bruce Hanes, 62, has been involved in the sale of 7,400 apartment houses in Los Angeles County over the last 30 years, nearly half of them in the San Fernando Valley area.

Hanes, president of Westlake Village-based Hanes Investment Realty Inc., and his senior associate, Todd S. Schwartz, 37, are also landlords. Between the two, they own five Valley apartment buildings with a total of 233 units.

They talked to The Times recently about market trends in the Valley apartment business.

Question: What is the health of the apartment business in the San Fernando Valley right now?

Hanes: It stands very healthy. This apartment market is the most viable we've seen since 1991. Owners, after years of massive foreclosures, are starting to see a return on their investment. Vacancies are down in the area of 1% to 3% at the most, if you've got a viable operator. And the turnover rate, which at one time was up to 40%, is now in the high 20% and low 30% range per year.

But the values for real estate are only now coming back to what they were between 1987 and 1990. They fell for a long time.

Schwartz: It's positive for sellers right now, because there's a lack of available product. We see between five and 10 buyers for every available property to buy apartment houses. Essentially, what we have is supply and demand out of balance. Importantly, values have increased steadily for the last five years. They're outperforming other investment opportunities, for example, the stock market, this year. The Nasdaq is down 35% to 40% from its all-time high, but we have apartment values on a cost-per-unit basis, increasing more than 14% this year. So real estate is, by far, the better investment.

But at the same time, we appear to be at a peak or crest in value. What we have are apartments that are selling with very little cash-on-cash return to the investor. Some are break-even and some even negative cash flow on properties that we're selling.

Q: Why would buyers buy a negative-cash-flow property?

Schwartz: Because investors are looking at future appreciation, the ability to raise rents over time and the fact that we have a lack of apartment construction with so many jobs being created.

Hanes: Statistically, we're finding that probably only one apartment house is being built for every 14 to 17 new jobs being formed in this state.

Schwartz: And most of these buyers do have portfolios that they started building in the mid-1990s, so their portfolios are able to absorb any losses on buildings they purchase today.

Q: Is there a shortage of apartments for working-class families?

Schwartz: It's true that of the properties being constructed, most tend to be high-end luxury apartment buildings. The affordability index in Los Angeles indicates that the amount of rent that the average family can afford to pay here is $1,070 per month. But the average rent at these newly constructed luxury apartment buildings [in Los Angeles County] is $1,600.

Hanes: Really the only area that makes sense right now for builders is high-end apartments, due to costs of $80 to $100 per square foot to build [apartments] that rent for from $1.60 per square foot to over $2 per square foot a month. Typically, when builders build high-end product, initially they build it as being apartment buildings, but they build it to condo specs with the idea of converting the building later on.

Q: When did the dynamics of apartment building begin to change?

Schwartz: In late 1980s, especially from 1989 to 1990. During those years, apartment construction virtually shut down. Coming out of the recession, the only construction that made financial sense was that of the larger, luxury-type apartments.

Q: Why did it shut down?

Schwartz: Some buildings were running at 60% vacant. There were families that were doubling up in apartments, and because of the long recession and real estate depression that we had, there wasn't any incentive to build. A lot of builders went out of business.

Hanes: The market fell apart for all kinds of reasons. People left because of the [Northridge] earthquake, we had a severe recession, we had riots, firestorms . . . over 1 million jobs were lost in the state of California. The military and aerospace industries almost essentially shut down after the end of the Cold War. We had about six or seven factors lined up against us. Unemployment in Los Angeles County was over 10%; it's now under 3.7%. At the end of the 1980s, we saw the building of more mid-range apartment houses come to a complete stop.

Q: What are some of the deterrents to the construction of new apartment buildings, especially for low-income units?